Oil, Gas, and the New Relationship between the United States and Russia

Oil, Gas, and the New Relationship between the United States and Russia

Raghida Dergham |

The compass of the geopolitical strategic balance of power is turning towards a qualitative relationship between the United States and Russia, following a phase of tension in their relationship, the features of which had clearly appeared first with regard to the issue of Syria. The reason for this is certainly not the American-Russian understanding over the destruction of Syria’s chemical arsenal, reached two months ago, despite its limited importance. Neither is the reason solely the new state of intimacy achieved by the American-Iranian relationship, after it had been a relationship of truce seeking at the core in the first place. Nor is it the start of talks on the nuclear issue with Tehran – despite its importance. Indeed, the main link between America’s interests and those of Russia is that they have both become oil and gas giants – and both want understanding and cooperation between the two oil and gas superpowers. The United States has recently discovered the size of its own oil and gas wealth – colossal wealth that has come as a result of the discovery of underground shale oil and gas deposits in and around US territory, in what has become known as the “Shale Revolution”. Russia has waged its war in Syria for several reasons, one of the most important and most prominent of them being to prevent the passage of natural gas pipelines from Qatar through Syria to Turkey then Europe – as this would have the potential to shatter Russia’s monopoly on natural gas wealth revenue in the European market in particular. Part of the “Grand Bargain” that is taking shape involves the relationship between the United States and Russia, in light of the fact that the two of them together control the largest and most important oil and gas reserves in the world. From here, one can begin to answer questions about the concerns felt in the Middle East region – and in particular in the Arab Gulf region. Indeed, the latter is wondering what could have led to the current situation in Syria, with Iran and within the framework of the relationship between the United States and the Arab Gulf, of which the main feature had been oil from the Gulf in exchange for American security guarantees for Arab Gulf countries. To be sure, Iran is doing well on the back of the renewed relationship between the United States and Russia. And so is China. As for the losers, as it appears so far at least, they are Europe as well as Arab countries.


One of the questions that have caused a great deal of perplexity for many years is this: why did the United States rush to withdraw from Iraq without leaving a foothold for itself in the form of military bases or otherwise, after it had heavily invested in a costly war – despite the fact that some Arab countries have covered some of its financial cost? One seasoned observer provided this answer: “The Americans discovered at the time the size of their own wealth of oil and gas, and thus decided that they had no need for Iraq’s oil and for its reserves, nor for the claims they had made about the Iraq War having been for the sake of democracy and freedom. They thus rushed out of there after having spent trillions of dollars. Indeed, the strategic equation had changed, and it required rushing to withdraw without anything in return”.


The pattern of instant abandonment without warning is not new to American policy. In fact, the United States has historically had a reputation based on abandoning allies once there are no more benefits to be reaped from them. What is new is that what has been discovered under President Barack Obama exceeds many times over what had begun to appear under former President George W. Bush. It should in fact be stressed that the plans for withdrawal from Iraq were drawn up at the end of the Bush era, and then the Obama administration came and implemented them hastily and with unusually great speed.


Such a pattern and such a reputation are a cause for embarrassment for some in the United States, where long-term strategic decision-makers, who are part not of the governing administration but rather of the “establishment,” devise strategies for decades, not years, in the country’s future. Part of this establishment pauses at such embarrassment and shame, especially as the new direction taken by the United States comes at the expense of the values which America had claimed to be an integral part of its structure that it would never abandon, no matter what. The other part says: “so be it” – America no longer needs to satisfy anyone or to pay the bill for being provided with oil and gas. Indeed, it is no longer in need. America wants to restore its finances. As for values such as humanitarian intervention, insistence on human rights, or refusing to stand idly by and watch crimes against humanity and war crimes being committed, they are at the moment harmful to the strategic equation and to necessary alliances.


Russia seems to be at the top of the list of such alliances, regardless of the nature of the government there and regardless of – superficially – apparent differences. Russia has allied itself with Syrian President Bashar Al-Assad, who the Obama administration says has lost his legitimacy and whom it accuses of having used chemical weapons against his own people. Yet this has not been an obstacle to the major rapprochement that has recently occurred.


Part of what has been happening recently is that Qatar has withdrawn from the battle over Syria, and that the war of gas pipelines between Russia and Qatar has thus come to a stop. Some say that the United States inspired, or endorsed, the transformation in Qatar’s stance, which was accompanied by change at the highest level of power and the start of a new era in Qatar. At any rate, Russia views this as a victory for itself in terms of the future of its own natural gas wealth. Indeed, Qatar had the ability to obstruct Russia due to the amount of natural gas at its disposal, and pipelines to Europe would have had the potential to dwarf Russia’s natural gas wealth.


Iran, as asserted by a well-informed and trusted source, had been at the forefront of opposition to natural gas pipelines stretching across Syria and Turkey. And Iran has fought in Syria and for Syria not just for the sake of the regional role it insists on playing, but equally so for reasons that fall under oil and gas considerations.


Iran is still exporting its oil despite being subjected to American and international sanctions. The largest importers of oil from Iran are China and India, as asserted by the CEO of the Total oil company during a very productive session at the Council on Foreign Relations (CFR) in New York last week, which brought together Christophe de Margerie from France’s Total and the CEO of pioneering Italian oil and gas company ENI, Paolo Scaroni. De Margerie asserted that what Iran was exporting to China and India was not necessarily part of the “exemption,” while another expert said that the United States had been the one to provide such an extent of exemption for China to obtain large quantities of Iranian oil. Indeed, Iran continues to pump oil despite sanctions, at a rate of two million barrels a day. And China is comfortable with this, especially as it is paying discounted prices.


Europe is likely to lose the most as a result of the Shale Revolution, which Europe may or may not join. This is also because Europe falls between the grips of the United States and Russia, and will not be able to compete. In fact, it may well be forced to consider Russia to have become “Europe’s Texas.”


Paolo Scaroni frankly says that natural gas prices in Europe remain three times higher than they are in the United States, and that the cost of electricity is more than twice what it is in America. Thus, Scaroni says, “for me it’s very hard to imagine how Europe can recover and start again a process of re-industrialization with such a differential in the cost of electricity and gas. This is going to be a major issue for Europeans.”


Regarding the production of shale oil, on the other hand, the quantity is not yet known at the international level, but “in any case, shale oil is going to be expensive, not cheap,” according to Scaroni. Thus, American energy independence will not help Europe. Rather, “Europe is worse off as far as industrial competitiveness is concerned, no doubt about that. And Japan, as well, because to have as a competitor in terms of cost America is very different than having as competitor Qatar or, I don’t know, Iran. America is already very competitive, in terms of labor, in terms of market, in terms of business-friendly environment, et cetera. If on top of that you add a huge differential in energy, I hardly can imagine anybody making an energy-intensive investment in Europe”.


De Margerie agrees and points to ownership, laws, and technological capabilities, coming to the conclusion that the Shale Revolution is not an international revolution, but rather an American one. Even if there were major underground deposits of oil and gas in and around Europe, the cost of extracting them would be too high. They both agree that the leadership role in exploring Europe’s future in the field of shale oil would go to Britain.


Scaroni considers that, if no shale gas is found in Europe or if it proves impossible to extract, “the only thing I’m looking very much forward, no, so 20 years from now, is to think that our Texas will be Russia. Now, why I’m saying that? Because we have Russia next to us with unlimited resources of gas, unlimited. And they need to have a big customer.” This is why the major oil and gas companies will be investing intensively in Russia in the next two decades.


China might possess its own wealth of shale gas, yet it continues to rely primarily on oil imports from Africa, alongside Iran.


De Margerie considers that the United States’ problem is that it will be pumping as much shale oil as it possibly can and will be suffering from “instability.” This is why it would be wise for it to pay heed to traditional factors of stability in the world of oil, and in particular the Kingdom of Saudi Arabia. De Margerie also says that Libya had shocked oil companies, because the Libyans decided to stop exporting oil, but not to stop producing it, and that “production cannot be continuing because, I mean, they don’t export.”


De Margerie adds, addressing the Americans: “I can tell you, if you don’t have the equivalent of Saudi Arabia, you will not make it (…) let’s be careful. Let’s talk with the Saudis.”


Scaroni points to the fact that ENI is working intensively in North Africa, adding that “Personally, I’m confident that Algeria – there are strong institutions, very strong institutions (…) will go ahead relatively smoothly”. Egypt too seems to be “heading towards stability. We have never lost one barrel of oil production all along this period. We are the biggest producer of oil and gas in Egypt, which makes me think that the people are aware that they need desperately to continue to produce oil and gas.” Even in Libya, Scaroni is optimistic on the long run – unlike De Margerie, who said that if he had not already invested in Libya, he would not invest in it today. ENI has to be optimistic because it is producing 300 thousand barrels of oil a day in Libya, but it is also because “I cannot believe that the Libyans, who are wise, will – will throw away the wealth they have (…) [and] destroy all this”.


The Shale Revolution will profoundly affect the balance of energy, its sources and the weight carried by its exporters, locally, internationally and within the framework of bilateral relations.


Whether Arab oil has been a blessing or a curse for the region, the Shale Revolution could worsen the curse or multiply the blessing. It all depends on how the Arabs will adapt to the new developments in the field of oil and gas, and to the relationship between the United States and Russia, which raises them once again to the rank of giants, yet his time in the field of oil and gas, and not necessarily in terms of cold war.